Hire purchase
An agreement to buy an asset through an initial payment followed by instalments, with ownership passing to the buyer only once the final instalment is paid — unlike a lease, where the lessor stays the owner throughout.
In plain language
Buying something outright takes the full price up front. A hire purchase agreement offers a middle path between buying and simply renting.
Under hire purchase, the buyer makes an initial payment, then pays the rest in instalments over time. Crucially, ownership does not transfer at the start. The buyer becomes the legal owner only when the final instalment is paid.
This is what separates hire purchase from a lease. In a lease, the lessor stays the owner throughout, and the lessee never becomes the owner, even after the lease period ends.
How it works
A hire purchase transaction has 2 payment components: the initial payment, made up front, and a series of instalments spread over the agreed period. Until the last instalment clears, the asset legally still belongs to the seller, not the buyer, even though the buyer already has possession and use of it.
This structure is common for durable assets like vehicles and equipment. Against a lease, the distinguishing test is simple: does the person using the asset ever become its owner? Under hire purchase, yes, at the end. Under a lease, no, never.
A worked example
Priya wants a Rs 8,00,000 delivery van for her business but cannot pay the full amount up front. She signs a hire purchase agreement: an initial payment of Rs 1,60,000 (20%), followed by monthly instalments on the remaining Rs 6,40,000 over 4 years.
Until her final instalment clears, the van legally belongs to the financier, even though Priya drives it every day. The moment she pays the last instalment, ownership passes to her. Had she instead leased an identical van on similar monthly terms, she would never become its owner, however many years she kept paying and using it.
Why NISM asks about it
Chapter 4 (Debt Management and Loans), section 4.7.4 (Hire Purchase), defines the agreement immediately before contrasting it with a lease in section 4.7.5. Expect a question testing whether a described transaction is a hire purchase or a lease, based on whether ownership eventually transfers.
Common exam traps
- Ownership transfers only on the final instalment — not at signing, and not gradually as instalments are paid; it is an all-or-nothing transfer at the very end.
- The lessor never transfers ownership in a lease, however long the lease runs — this is the one fact that distinguishes hire purchase from a lease in every exam scenario.
- Hire purchase is also a business NBFCs are specifically permitted to engage in, alongside loans, leasing and insurance business.
Check yourself
1.What distinguishes a lease from a hire purchase agreement?
- a)A lease involves instalments while hire purchase does not
- b)In a lease the lessor remains the owner and the lessee never becomes owner, whereas in hire purchase ownership passes on the final instalment
- c)A lease is always for immovable property
- d)Hire purchase requires no initial payment
Show the answer
Answer: (b) In a lease the lessor remains the owner and the lessee never becomes owner, whereas in hire purchase ownership passes on the final instalment
"The difference in a lease as compared to a hire purchase is that THE LESSOR WILL REMAIN THE OWNER of the asset and THE LESSEE CANNOT BECOME THE OWNER even after the specified lease period is over." In hire purchase "the person paying the amounts BECOMES THE OWNER OF THE ASSET WHEN THE FINAL INSTALMENT IS PAID."
2.Which of the following is NOT a difference between an NBFC and a bank according to the chapter?
- a)NBFCs cannot accept demand deposits
- b)NBFCs cannot issue cheques
- c)NBFCs do not have deposit insurance with the DICGC
- d)NBFCs cannot engage in leasing or hire purchase
Show the answer
Answer: (d) NBFCs cannot engage in leasing or hire purchase
NBFCs are in fact "companies that are engaged in the business of LOANS AND ADVANCES, LEASING, HIRE PURCHASE, insurance business or chit business." The three stated differences are that they cannot accept demand deposits, cannot issue cheques, and do not have the benefit of deposit insurance with the Deposit Insurance and Credit Guarantee Corporation.
Where this is taught
Free preparation for NISM Series X-ARelated terms
- Non-Banking Finance CompanyA financial institution — grouped by the booklet with commercial banks under RBI supervision — whose deposit-mobilisation activity, when it goes wrong, is a Reserve Bank of India grievance, not a SEBI one.
- LeaseA contract in which the owner of an asset, the lessor, lets another person, the lessee, use it for a period in exchange for lease payments — and keeps ownership throughout.
- MortgageA loan secured by a charge on the property it funds: the borrower keeps the asset in his own name, and the lender can take it over and sell it if the loan is not repaid.
- Promissory noteA written, unconditional undertaking signed by its maker to pay a certain sum of money to a named person, to that person's order, or to the bearer — defined by Section 4 of the Negotiable Instruments Act, 1881.